21 September 2012 11:05 [Source: ICB]
Many Chinese factory workers have been asked to down tools
A widely held assumption is that China will manage to turn its economy around over the next few months as a result of growth-friendly central government policies.
It has worked before, most notably in 2008-2010, and so it can work again, is the logic.
Further reductions in interest rates are expected before the end of 2012, along with additional cuts to the bank-reserve requirement - the amount of money that banks have to set aside against their lending.
Beijing has also already granted fast-track approvals to 500 locally funded infrastructure projects. This could deliver a boost to beleaguered chemicals and polymer markets by as early as the fourth quarter of this year.
But evidence from polymer markets suggests that the cost and availability of financing is not the issue; instead it is the willingness to borrow money.
Small and medium-sized enterprises, which make up the bulk of resin buyers in China, have lost their appetite for risk because of the weak economy. Local governments are also reported to be struggling to fund new infrastructure projects as a result of declining revenues from land sales.
Selling land to industrial and real-estate developers has been the main source of local authority income over the past few years.
But Wen Jiabao, China's premier, has repeatedly emphasised that there will be no let-up in central government policies that have brought real estate values down.
Soaring property prices during 2008-2010 widened the gap between the rich and the poor, and slowed down efforts to rebalance the economy away from investment and towards more domestic consumption.
A further source of optimism, though, is that Beijing will have more time to focus on the economy once this year's once-in-a-decade leadership transition is out of the way. From October this year, senior members of the Politburo are due to be replaced, including the premier and president.
"The sooner we get the leadership change out of the way the better, as the focus right now is on politics rather than the economy," said a senior Asian-based executive with a global poylolefins producer.
But he then admitted that his "big worry" was that the leadership transition would take longer than expected, leading to a delay in introducing pro-growth policies.
A sales and marketing executive with a European speciality chemicals producer agreed that everything would be fine once the new leaders were in place.
"I think they will adopt very accommodative policies for growth," he added.
Many economists caution, however, that the new leadership will still be caught between a rock and a hard place.
The rock is that the easiest way to get the economy booming again is through another big splurge on investment, with the hard place being that this could add to environmental and bad-debt problems, while slowing down the rebalancing of the economy away from investment. A good illustration of this dilemma is that while Beijing has sanctioned the 500 local government infrastructure projects, involving new bridges roads and sports stadiums, the restrictions on real-estate speculation remain firmly in place.
Michael Pettis, finance professor at Peking University's Guanghua School of Management, takes a positive view of recent rebalancing efforts. "What is happening in China may be just what China and the world need," he wrote in a 17 August post on his blog, China Financial Markets.
"After many failed attempts, over the past six months we may be seeing for the first time the beginning of China's urgently needed economic rebalancing, in which China reduces its overreliance on investment in favour of consumption." But he added: "China bulls, late to understand the unhealthy implications of the distortions that generated so much growth in the past, have finally recognised how urgent the rebalancing is, but they still fail to understand that this cannot happen at high growth rates.
"The problem is mainly one of arithmetic. China's investment growth rate must fall for many years before the household income share of GDP (gross domestic product) is high enough for consumption to replace investment as the engine of rapid growth."
He warned that if China's leaders stuck to the rebalancing efforts of the first six months of 2012, Chinese GDP growth would fall to as low as 3% per annum over the next few years. The conventional view is that growth at such a low level would prompt major social unrest, but Pettis disagrees, as argues that effective rebalancing will lead to household income growth of 5-6% per year.
"Households don't care what GDP growth is. They (instead) care about growth in their spending power," he added in the same blog post.
FROM 53% TO 1.7%
Whoever is right about more fiscal stimulus, or a painful and long process of economic rebalancing, what is absolutely clear is that this year has been an immense disappointment.
In early January, some investment banks and chemicals companies were confidently predicting chemicals and polymer demand growth in excess of GDP.
Instead, in the case of polyethylene (PE), apparent demand (imports plus local production) grew by just 1.7% in January-July compared with the same period in 2011, according to Global Trade Information Services (GTIS). Growth during January-July 2012 was flat over the same seven months in 2010, added GTIS. This compares with the 53% apparent demand growth seen in 2008-2010, again according to a GTIS estimate.
"It is quite clear that demand was brought forward during 2008-2010, when China launched a big economic stimulus package to compensate for the global financial crisis," added the Asian-based executive with the global polyolefins producer.
The stimulus package resulted in a surge in trader inventories in all the major synthetic resins that still has to be worked off, according to a June 2012 HSBC report.
Demand growth for PE, polypropylene (PP), polyvinyl chloride (PVC), polyethylene terephthate (PET) and acrylontrile butadiene styrene (ABS) averaged just 2.7% from Q1 2011 up until June of this year, compared with a 9.1% increase in GDP, said the report.
Returning to PE, Middle East exports to China rose by 40% in January-July 2011 over the same period in 2010, as overall imports fell by 1%, said GTIS.
The effect on higher-cost naphtha-based producers, in terms of both market share and profitability, has been significant.
Northeast Asian (NEA) shipments to China were down by 32% when January-July of this year was again compared with the same months in 2010, added GTIS.
And in August this year, NEA integrated variable cost margins for low-density PE (LDPE) reached their lowest level since ICIS records began in 2000, according to the ICIS Weekly Asian PE Margin Report.
Another major factor behind disappointing markets has, of course, also been the weak global economy, leading to a decline in China's exports of manufactured goods to the West.
In late August there were reports a big build-up in stockpiles of finished goods, as both export trade floundered and domestic consumer spending weakened.
For example, dealership inventories of new cars were reported to have risen by 900,000 to 2.2m between the end of December and the end of June.
"OK, it looks gloomy right now but the average PE growth rate from 2008 until 2012 has been excellent," said an industry observer.
"Yes, the industry is struggling right now, but I am sure China will return to trend-growth next year and beyond, thanks to rising urbanisation and the growth in the country's middle class."
Let's hope it's that simple.
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